How real is the rally?

On Friday, November 1, the benchmark stock index, the Sensex, scaled a new high in early- morning trade, bettering its previous record set in January 2008. At one level — admittedly a superficial one — the record-breaking performance of the index is to be seen as a spectacular recovery for the country’s equity market after the economic crisis impacted adversely on corporate balance sheets, leading to a steep fall in their earnings. By the middle of the year the rupee had started declining rapidly, investor confidence was ebbing, and leading brokerages were threatening to downgrade India’s stock markets. Since then confidence might have returned to the markets, but it is by no means clear whether the rally in stocks has any deeper significance than what is apparent. After all, the largely liquidity fuelled rally cannot last indefinitely, dependent as it is on large and sustained buying by foreign institutional investors and portfolio managers. The decision by the U.S. Federal Reserve to continue with its ultra-soft monetary policy has certainly helped for now. A mere hint of winding down the stimulus in May caused a massive flight of dollars back to the U.S. from emerging markets including India. The rally has puffed up the valuations of some shares, but a larger number have lagged behind. Skewed stock indices do not give a correct picture of the stock markets, leave alone the broader economy.

There are other aberrations. Shares of medium-sized companies have not participated in the rally so far. Retail investors who are the backbone of stock markets continue to stay away. Other spin-off benefits from a rising market have not materialised. The government is unable to push through with its disinvestment programme. There is no logical reason why certain sectoral stocks should rise so spectacularly. Bank stocks, especially of public sector banks, have risen, brushing aside the serious problems they face, such as a high level of non-performing assets (NPAs). Finally, the disconnect between the financial sector and the real economy has been spectacularly demonstrated and growth remains subdued. The government optimistically hopes for a growth rate of around 5.5 per cent this year, which will be a dramatic improvement over the 4.4 per cent in the first quarter. There has been some good news recently. As the Finance Minister has emphasised, the current account deficit has become eminently manageable, agriculture is in for a revival as monsoons may be favourable, and there is some hope that the industrial sector will turn around. Welcome as these signs are, they do not indicate an imminent revival to old levels, and certainly do not justify the massive stock market valuations.

As Warren Buffet or was it his guru Benjamin Graham who said that the stock market is a voting machine in the short term and a weighing machine in the long term. Also, volatility is a primary characteristic of stock markets. People who invest in stock markets should understand the nature of markets, particularly volatility and risk, before they put their hands into it, otherwise they will get slaughtered . It is greed which brings retail investors into stock markets and those that are looking to make a quick buck, based on tips, rumours etc are the ones that get chopped up. For this they have to blame only themselves for not making adequate preparation prior to their entry.
Mutual funds have provided a wonderful conduit to retail investors to tap the benefits of equity markets in a relatively risk free manner. Many long term investors have profited from a conservative investing strategy using mutual funds and hopefully their numbers will grow.

from:
Bhaskar Bhattacharya

Posted on: Nov 4, 2013 at 13:19 IST

Share market is for investment; but what's going on is speculation, and utter nonsense by self proclaimed experts on TV about trading prices.

To make the system heather and to go back to strong fundamentals, we need to make trading prices equal to IPO/book value of the share/equity.

In my opinion, I strongly suggest the need to stop the ongoing trend of bid price and offer price.

from:
Abhishek H S

Posted on: Nov 4, 2013 at 12:07 IST

When speculators take control, fundamentals are ignored. As you have pointed out the share markets must reflect the health of the economy but are they doing it right now? What the markets would do for FIIsâ sentiments is the subject of the experts. But I am concerned about fate of small investors. Past history of retail investorsâ experiences reveals that in situations of a continuously bullish stock market, small investors are often the biggest losers. They make an entry at the wrong time and also make an exit with a loss or poor return. There is a famous saying about the retail investorsâ plight: In the stock market there are bulls, bears, and pigs! Is this going to be the situation this time too? Would small investors be slaughtered like pigs?